Adjusting withdrawals upwards

[walkinwood]

Hello All,

Suppose you started taking withdrawals of 4% (Assume this is the SWR you're comfortable with) of your initial portolio & adjusted withdrawals for inflation each year.

After x years, if your portfolio was GREATER than the inflation adjusted original amount, can't you then take 4% of this increased portfolio & treat that as your new initial withrawal amount & move on from there?

After all, an SWR is the maximum initial amount you can withdraw from your portfolio & still have it last a lifetime based on historical returns.

Is my logic correct or am I missing something?

Note: the 4% is only an example. Take whatever SWR you wish.

Regards,
ww

 

[d]

the increased portfolio and the now-reduced planning horizon would both suggest that the withdrawal rate could be increased if you wished to maintain the original success rate. BUT, having successfully navigated the early years of the withdrawal plan, the current success rate has undoubtedly increased ... so increasing the SWR would decrease the success rate from where it now stands.

 

[mickeyd]

can't you then take 4% of this increased portfolio & treat that as your new initial withdrawal amount & move on from there?

Sure you can. It is your money and you are in charge of it. The SWR 4% mantra is just a guide that assists us in planning and executing our retirement plans.

Just LBYM and all will be fine!!!

 

[Rich_by_the_Bay]

The only caveat I would add is that if you are going to increase your SWR when times are good, be prepared to decrease it when times are bad. Just cherry picking might leave you with a withdrawal rate that is waayyy too high if things go sour for a few years and you continue your "good old days" higher adjusted withdrawal rate.

Gotta take the good with the bad to stay safe.

 

[REWahoo]

The only caveat I would add is that if you are going to increase your SWR when times are good, be prepared to decrease it when times are bad. Just cherry picking might leave you with a withdrawal rate that is waayyy too high if things go sour for a few years and you continue your "good old days" higher adjusted withdrawal rate.

Gotta take the good with the bad to stay safe.

Isn't all that taken care of by the fact your SWR time horizon is shortened (you have fewer years to live/withdraw)?

 

[wabmester]

After all, an SWR is the maximum initial amount you can withdraw from your portfolio & still have it last a lifetime based on historical returns.

Right, but only if you're using an SWR with a 100% success rate. For whatever reason, some people feel that, say, 90% success is "close enough." In which case, the algorithm you're suggesting is known as "searching for the failure sequence."

 

[REWahoo]

WW, here is a quote from the "Best of the Boards" thread "Explain the 4% Withdrawal Rate". It answers your question in detail:

...We are saying that 4% of the starting balance is safe, meaning that starting from any arbitrary point in time, we can initiate a series of ~30 annual withdrawals of 4% of the portfolio balance at that point in time, with adjustments for inflation.

We usually talk about this in the situation when the portfolio goes way down -- and the whole purpose of the safe rate discussions is to give us some comfort that if we stop our paychecks early, we can reasonably count on at least 4% of the balance at that point for the next ~30 years.

But look at the positive side. Let's say that in 5 years, the portfolio is at 1.2 million, after starting at 1 million. (Assume these are all inflation-adjusted dollars for this discussion.)

What has happened?

One thing that has happened is that we have "lucked out", as the scenario that is worst for the survival of a portfolio is a large and lengthy market decline starting immediately after we decide to begin the withdrawals. Except for that scenario, the rate would be a good bit higher.

Another thing that has happened is passage of time. So now, instead of needing a $1 million portfolio to last for 30 years, we need it to last for only 25 years.

We can take advantage of our good fortune (timing retirement when we don't have an immediate bear market afterwards) and our new circumstances (more money and a shorter time to spend it) in a couple of different ways.

One -- we can start over. Just designate this new moment as the start of the withdrawal program, and take 4% of 1.2 million, or $48,000 instead of $40,000, for the next 30 years (or you could take ~4.2%, since you are now looking at 25 years instead of 30...), or,

Two -- we can take a $200,000 "bonus" to get the portfolio back down to $1 million, and continue drawing 40,000 for 30 years (or 42,000 for 25 years).

(This seems counterintuitive, but all that is happening is that we are reducing the amount that would have been left over at the end of the 30 year period, since we didn't get the bear market in the first 5 years.)

So... 4% sets your minimum withdrawal even in bad times, but you can adjust upwards following good years.

Hope this helps -- dory36

 

[Bikerdude]

More money in your portfolio and less years to spend it. Logic seems sound to me.

 

[chinaco]

You will (should) be monitoring the health of your portfolio all along with forward looking projects as each year passes. If things are not looking good, you will need to make permanent (or semi-permanent) adjustments. You will likely throttle back your spending (on discretionary items).

Since you cannot predict the future, you need to be prepared for several scenarios (think through) and understand how you intend to adjust.

 

[donheff]

We have discussed this one before and I think the consensus was yes, you can do it. The caveat was that if you continue to reset you are chasing a bad starting period. i.e. eventually you may reset just before a prolonged bear market sets in. So called "SWRs" that fail tend to do so when the starting period is bad resulting in the portfolio being drawn down to far to recover. But if you combine reseting with flexibility to reduce spending you should be fine. A simple example would be to start out a whatever (e.g. 4%). After 5 or 10 years recalculate as if you were starting over. Take your "first" year of higher (e.g. newly calculated 4%) withdrawals but commit to drop back to the previous rate if the market performs poorly. If things go well for several years on the new rate, rinse and repeat. If things do poorly you drop back to the old SWR to avoid the over large draw down.

Keep in mind, almost all simulated runs show your portfolio increasing in value during the early years. That is one of the factors that assures your success keeping up with inflation in later years. It probably only makes sense to reset if the market does significantly better than expected for the first few years. If you gobble up every bit of growth in new rests you really will eventually catch a scary down cycle.

 

[REWahoo]

You will (should) be monitoring the health of your portfolio all along with forward looking projects as each year passes. If things are not looking good, you will need to make permanent (or semi-permanent) adjustments.

While I believe you should make adjustments and that most of us would certainly do so, if you are a loyal member of the SWR cult (and began your withdrawal at a safe rate) you would not need to make an adjustment.

You go first.

 

[RASAP]

The caveat was that if you continue to reset you are chasing a bad starting period. i.e. eventually you may reset just before a prolonged bear market sets in. So called "SWRs" that fail tend to do so when the starting period is bad resulting in the portfolio being drawn down to far to recover.

Yeah but...

If you chose your SWR based on 100% success rate, it shouldn't matter that you FIRE at the worst possible time. No?

 

[donheff]

Yeah but...

If you chose your SWR based on 100% success rate, it shouldn't matter that you FIRE at the worst possible time. No?

Sure. And it is very likely that you could keep reseting every few years and never run into a problem. But s*** happens. What if past is not prologue. If your portfolio tanks 60-70% in the first three years of retirement are you going to keep spending at the original SWR rate?

 

[Jarhead*]

Yeah but...

If you chose your SWR based on 100% success rate, it shouldn't matter that you FIRE at the worst possible time. No?

Technically, according to studies (Firecalk), based on prev. history probably so.

But if you ran into a stretch like 1966 to 1982, you'd need a set of "huevoes" the size of basketballs to soldier on.

More likely, (if you're young enough), less than mid-way through, checking the help-wanted ads would be part of your to do thing daily program.

 

[unclemick]

Sure. But s*** happens. What if past is not prologue.

Yep - life events over took my totally comfortable - cheap bastardhood - while Mr Market done good overall for 13 years of ER.

Gonna try 5% variable with the Norwegian widow as backup.

Boy o boy - post Katrina 1000 miles inland on a hill 'high above' the wide Missouri flood plain.

?Does that count as a Bear Bryant adjustment?

heh heh heh - still like Firecalc, handgenades, and the ability to adjust. :

 

[Rich_by_the_Bay]

Isn't all that taken care of by the fact your SWR time horizon is shortened (you have fewer years to live/withdraw)?

Don, the trends may be partially offsetting by coincidence but they are independent phenomena. You could easily outpace your "safe" withdrawal rate a lot faster than your time horizon diminishes. Doubt you'd get into trouble if you reframed every 5 years or so, but....

To use an exaggerated example, suppose the market returned 10% a year for 5 years. Your 4% initial SWR on $1mm goes from $40K incrementally every year to $66K per year. Now the market averages -10% a year for 5 years and leaves you with $996K. Your cherry picked withdrawal rate is now 6.6% of your nest egg. That's without inflation. True, you now have 25 years to live instead of 35 years, but that's long enough to get into real trouble if you don't reset the SWR down as well as up.

I'm leaning toward a flexible withdrawal rate (up or down) with a 95% stop-loss on the down side (per ESRBob), and maybe a ceiling of half the return above inflation on the high end (Gummy).

 

[jIMOh]

Hello All,

Suppose you started taking withdrawals of 4% (Assume this is the SWR you're comfortable with) of your initial portolio & adjusted withdrawals for inflation each year.

After x years, if your portfolio was GREATER than the inflation adjusted original amount, can't you then take 4% of this increased portfolio & treat that as your new initial withrawal amount & move on from there?

After all, an SWR is the maximum initial amount you can withdraw from your portfolio & still have it last a lifetime based on historical returns.

Is my logic correct or am I missing something?

Note: the 4% is only an example. Take whatever SWR you wish.

Regards,
ww

YES... 4% in the "initial" or starting withdraw rate. IWR or SWR if you will. It is possible if portfolio increase 10% the year after retirement, the WR will be much different than 4% of portfolio value.

When you can withdraw 4% of portfolio, you can retire, this implies you have saved enough to meet your expenses.

 

[Nords]

Everybody talks about raising their SWR, but for what purpose?

If we're happy on our current SWR, then what more do we need?

I could see boosting charitable donations or maybe taking a fantasy vacation, but the general idea of raising the SWR seems to put one on the "You can't spend it fast enough" treadmill...

I'm leaning toward a flexible withdrawal rate (up or down) with a 95% stop-loss on the down side (per ESRBob), and maybe a ceiling of half the return above inflation on the high end (Gummy).

I look forward to your stories about explaining this to Mrs. Rich!

 

[jIMOh]

Everybody talks about raising their SWR, but for what purpose?

If we're happy on our current SWR, then what more do we need?

I could see boosting charitable donations or maybe taking a fantasy vacation, but the general idea of raising the SWR seems to put one on the "You can't spend it fast enough" treadmill...
I look forward to your stories about explaining this to Mrs. Rich!

If you need 40k to live on, and have a 1 M portfolio to generate it, 40k is 4% of 1 M. But assume the 40k year 1 needs to increase by 3% (inflation) to 41.2k. The 41.2k the next year grows 3% etc... by year 10 I have this increasing to a withdraw rate of at least 5.5% to maintain spending. Assuming portfolio is growing at around 6%, it's quite possible around year 15 you will be drawing down principal and be "at point of no return".

 

[walkinwood]

Thanks for the insights.

My aim is to retire with a small cushion over and above what we spend today plus an educated guess on Property Taxes (I live in NJ!) and health insurance.

However, I've read many posts of people spending more in retirement than they did while saving for it. So wanted to see if the math for adjusting withdawals upwards after a market run-up works. And it looks like it should.

I understand the sh*t happens argument, but frankly, if I wait to make enough to take care of all possibilities, I will not be ERing, but LRing (Late retirement

I do have some safety valves. I'm young enough that I could go back to work if a bear market hits early in ER. I also live in one of the highest cost of living areas in the country, so I could move to a less expensive one. There are plenty just 50 miles west in PA. Relocating abroad is not on the books, but could be a possibility.

This board is great! Your considerate & thoughtful replies are really making me feel more comfortable about my plans.

 

[Rich_by_the_Bay]

I look forward to your stories about explaining this to Mrs. Rich!

I'll only explain the part where we are giving ourselves a well deserved half raise.

 

[deserat]

ESRBob has his 95% rule which I believe could also be 105% rule - this is a 'bracket' around the 4% which can be adjusted as per your portfolio performance - his Work Less, Live More book talks about this - it may not have the 105% bracket, but I posit based on his logic for the 95% that it would work - plus we all know that life is just probability functions anyhow - right? So why be absolute on the withdrawal amounts/%'s at all times.

Deserat

 

[Rich_by_the_Bay]

ESRBob has his 95% rule which I believe could also be 105% rule - this is a 'bracket' around the 4% which can be adjusted as per your portfolio performance - his Work Less, Live More book talks about this - it may not have the 105% bracket, but I posit based on his logic for the 95% that it would work - plus we all know that life is just probability functions anyhow - right? So why be absolute on the withdrawal amounts/%'s at all times.

Make that 5% plus inflation and I like it.

 

[free4now]

According to the studies one can maintain 100% success either with or without resetting withdrawals. But in some sense this is an artifact of the limited dataset that the studies are based on. If the SWR studies had more relevant data to work with, they would show more clearly that success rates decrease by resetting withdrawals upward.

Also, be aware that when the historical studies show 100% that doesn't mean your chances are 100% going forward... the future could be worse than history, and if so resetting withdrawals could make the difference between having enough and going hungry.

I am leaning towards resetting myself, but I don't take it lightly.

Another thing to consider is that as you get older your ability to go back to work decreases, so it is natural to want to take fewer risks. Whereas someone retiring at 40 years old might take the risk of a 4% withdrawal because they could go back to work if needed, that same person might need to lower their withdrawal to 3.5% to feel safe once they have passed the age that they could go back to work.

 

[rmark]

"4% in the "initial" or starting withdraw rate."

Its 4% of initial portfolio value + annual inflation. The assumption is that you continue to make inflation adjusted withdrawals from a portfolio of varying value, assuming good return years offset bad return years. Resetting to a higher draw after a few higher return years means you're spending away the growth needed to offset low return years. Resetting upward requires resetting downward also, eliminating the year to year stability in withdrawals.